Pork producers bear brunt of Chinese tariffsPork producers bear brunt of Chinese tariffs
Implementation of 25% tariffs on U.S. pork may limit industry expansion plans.
April 17, 2018
China’s proposed 25% tariffs on U.S. pork exports would reduce demand from China and cause pork supplies to back up in the U.S. market, leading to depressed local prices, according to a new Moody’s Investors Service report. The longer look also could limit expansion plans currently underway in the pork industry.
On April 4, China unveiled a list of 106 products on which it has threatened to impose new tariffs. This list was in retaliation to the U.S. government’s plans, announced March 22, to impose tariffs on $60 billion of Chinese goods.
The report said the lower pork prices that would result from the tariff would hurt hog and pork sales but drive packaged meat margins higher – a boost to pork-based packaged food manufacturers. The largest processors, including Smithfield Foods, Tyson Foods, Hormel Foods and JBS USA Finance, would experience a modest impact if the tariffs are enacted.
Because of its single-protein focus, Smithfield likely would be affected more than diversified processors, at least initially. However, Moody’s believes that Smithfield's global leadership in pork gives it advantaged access to alternative markets that would allow it to offset the negative effects more quickly than others. Tyson Foods and JBS USA operate in a variety of proteins or businesses that would help mute the overall earnings effects on pork operations.
According to the report, the largest pork processors, which typically export 20-25% of their output, have access to all of the major global pork import markets, including Mexico, Canada, Japan and South Korea. While this provides access to alternative export markets for U.S. pork, prices in those markets would likely soften due to larger U.S. supply, Moody’s noted.
“The brunt of the pain will be felt by smaller U.S. pork producers that lack value-added sales to offset the effects of falling pork prices,” said Brian Weddington, vice president of Moody’s.
Moody’s said many hog growers have generated major losses in recent years due to oversupply, and some are spending heavily to vertically integrate their hog production businesses into slaughtering operations, where the margins have been better in recent years owing, in part, to China’s strong demand for U.S. pork.
“If China imposes tariffs on U.S. pork, these expansion plans could lead to more losses for hog farmers,” Weddington noted. “Smaller processors are challenged by the lack of capacity to produce retail packaged meats to absorb excess pork supply and, due at least in part to their small scale, the absence of established relationships in global export channels.”
Rabobank anticipates that domestic pork consumption could rise to around 9.9 million tons to manage lower exports.
Even so, the Moody’s report said there are other mitigating factors that could help ease the potential tariff burden. For example, the U.S. is selling less pork to China today compared to a year ago due to gradual declines in China’s domestic pork prices that have made U.S. pork prices less competitive in China, and in turn, have led U.S. producers to shift sales elsewhere. Moody’s reported that in the last five years, U.S. pork exports by volume to China have fallen 11%, while exports to Japan have jumped 11%, and exports to Mexico have edged up 1%.
Total U.S. pork exports to China could decline 60% to around 120,000 tons in 2018, down from initial estimates of 300,000 tons carcass weight, according to Rabobank. China’s tariffs are not expected to change U.S. hog production materially, leaving alternative markets or increased domestic consumption as the only solutions.
Sterling Liddell, senior analyst for global data analytics with RaboResearch, said the loss of 200,000 tons of pork to China will result in a 10-15 cent impact on pork prices in the short term. China purchases a lot of variety meat, and finding a destination outside of China is more difficult. “A lot of that variety meat such as offal, legs and cheeks would probably go to rendering, which is a much lower value,” he said.
In the short run, pork cutout values may have to come down by $10-15 per head, Rabobank said in its recent report. “Domestic consumption and exports to Mexico may partially absorb this shock,” Rabobank added. “In addition, modest negative effects on other markets such as poultry, beef and feed grains are likely.”
Rabobank noted that corn and soybean production area may face a reduction of around 100,000-150,000 acres due directly to the decrease in pork feed demand.
If the 25% tariffs on U.S. pork continue through 2019, expansion plans for the industry may slow, Liddell said.
Rabobank noted that pork production may adjust and decline in 2019 from Rabobank’s initial preliminary baseline by 1.2 million head. “However, the corrective responses of consumption and production would begin to give some support in pork values in 2019, which may recover from 2018 averages by around 50%.”
Rabobank concluded that, in the end, implementation of 25% tariffs on U.S. pork may limit expansion plans for the industry.
Krissa Welshans contributed to this article.
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